Business Success: Critical Questions- retaining Money

How do I keep more of the dollars that I earn?
The most critical issue that we face to the entrepreneur is budgeting for their personal needs. Basically we look at the individual entrepreneur in terms of their life cycle. We categorize it into three specific cash outflows: Immediate Cash Needs, Intermediate Cash Needs, Prudent Financial Planning.

1) Their immediate cash needs. Basic living costs -- food, clothing, shelter. The next element would be their intermediate cash needs. They would be budgeting for items that were becoming due in a ten-year time frame. For example, student tuition for your children. And the third element that we consider is prudent financial planning. Long-term financial planning. Basically our objective is to look at age 55 and plan back from that point to determine what the client's cost of living would be and basically have accumulated enough principal that they would be living with after-tax dollars at age 55. So, depending upon the age of the client and their outside assets that they've already accumulated, we can determine the amount of cash that they want to retain in the business.

One thing that we have to emphasize to our clients is that we are an extremely debt adverse consulting firm. We don't recommend leverage. And our strongest clients that have survived the test of time have been those that have been able to reduce their break-even point to meet changes in the market and competitive pressures. Basically, if they own their equipment -- and that includes purchasing of vehicles rather than leasing of vehicles, for example -- they're able to be more flexible in their pricing and they're able to sleep and they have greater confidence level that they'll be able to move forward with their business.

In addition to the concept of being debt adverse, we emphasize the cost of taking out disposable income dollars for the entrepreneur. Basically every dollar that you take out of the business after payroll taxes and income taxes costs the business $2 for $1. So those are very expensive dollars to take out of the business. We look at items that can be paid directly by the business, for example, insurance, and how that is properly structured, that will be a deductible item for the business. We also look at cars and other direct benefits that would help the entrepreneur and reduce the amount of after tax dollars they would have to take out of the business.

But the important word in this process is budgeting. We need to again establish not only for the individual but for the business, a capital requirement budget. And that, in terms of the business, comprises the three components. It is a marketing budget, an operational budget and an administrative budget.

In terms of marketing budget, it's sitting down with a consultant and determining the target industry and client base that we're prospecting. In examining our capital investment, establishing a marketing budget, we want to determine a look at all the alternatives that are available: media, Internet, direct mail, telemarketing. We have to think about the hill that we want to conquer and the quickest way to get up that hill.

Operational Budgets

The business has to look at the work flow of its product and determine if there are any capital improvements or investments that would improve productivity and reduce manpower in terms of backlog or bottlenecks in their production or service cycle. Is there a piece of equipment that we can look at that would give us a one-year or two-year return on investment? I'm always amazed at our clients that are getting literally 100% return on investment for capital expenditures that are made that will benefit them for in excess of five years. There's no better return for an entrepreneur than an investment into his own business if those investments are wisely placed and not frivolously spent.

Administrative Budgets

Consider the business's information needs. And also retainage of the administrative staff that they need. The highest and best use of an entrepreneur's time is in marketing and promoting his company and dealing with operational issues. Not in doing the clerical repetitive functions.

After considering the personal need and the business need, there is a bridge that has to be built. And that bridge is financial planning. That financial planning can't be done just annually, it should be done systematically on a quarterly basis. The financial planning considers changes in the company's economy -- Are we doing better? Is our cash flow up? Is there an expenditure that we should make? -- and then coming back to a steady course of savings for the individual entrepreneur. But also we should look at issues of how those dollars come out of the business. Are there salaries that can be paid to family members that are actively working in the business? Is there a method of restructuring the organization in the form of a Sub S corporation or a limited liability corporation where income can be allocated to lower tax rate partners? Basically the idea of a limited liability corporation would be that we can have limited partners that have a financial interest in the corporation and they may even have a non-voting interest and be able to allocate income to those individuals that are in a lower tax bracket, children, for example. And at a later time, in the event that the corporation is to be sold, that the general partner, the active working entrepreneur can repurchase those limited units to consolidate the company and sale.

What we're looking for is to make sure the entrepreneur is able to meet their current and long-term cash needs and then transfer any additional cash flow that may be derived out of the business to lower tax bracket individuals. Part of this process may involve gifting as prudent tax planning devices in the event of a growing entrepreneurial business. We may want to look at gifting individual shares that are non-voting annually. In terms of personal financial planning, we want to look at tax sheltered investments and how those can be funded into a pension plan for the entrepreneur with also consideration to the individual employee.

After determining the amount of dollars that need to be disposed from the corporation or transferred out of the corporation, our financial planners will work with asset managers. And those asset managers will be held accountable to maximize our entrepreneur clients' return on investment. The asset managers will be given very specific instructions in terms of the level of risk that a client is tolerant of and the allocation of those dollars. The consideration will also be the estate planning of dollars taken from the corporation. That means that we will work with your attorney to determine the proper estate planning. If a trust needs to be set up for the children, then our financial planner will also look at the cash management of those funds in the trust.

We have affiliations with the number of asset managers including Merrill Lynch, The Providence Group, Bank of Boston. Clients are also recommended and highly advised to take an active participation in their asset management. Many clients provide and perform their own analysis and purchases. Many of them purchase indirectly into mutual funds. We do recommend that the entrepreneur be aware of their asset management, and hopefully not to the extent that it detracts from their core business. It is also our recommendation that any asset management arrangement that we would help facilitate be structured not on a per transaction basis, but as a percentage of funds under management. This avoids the churning of specific investments and is responsible for holding the broker accountable for the growth of that portfolio.


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